Ten years ago, I was walking through Kings Cross when I came across a man hanging by his feet from a tree. He wasn't dead or unconscious, just resting. "The Cross", as locals call it, is the closest Sydney gets to a walk on the wild side.

Slotted between glitzier Potts Point and Elizabeth Bay, most Australians know it as the city's red light district, but vice is only part of the story. In the 1920s, the area boasted tall apartment buildings and the seeds of a bohemian community. The risque reputation came during the second world war, when American troops found all the beer, sex, gambling and tattoos they could handle here.

It has remained an entertainment zone, embracing the tacky end of tourism in recent decades, and the narrow streets sandwiched between the giant neon Coca-Cola sign at the top of William Street and the El Alamein Fountain on Macleay Street are packed with cafes, clubs, bars and restaurants.

It has always been edgy, and popular, but never truly cool, apart from behind the walls of the Bayswater Brasserie and the newer, brasher Hugo's Lounge. Now, however, it is being reinvented as a hip place to hang out. It's always been accessible - just one train stop from the centre - and during the housing boom, hundreds of smart new apartments were built. Like the American troops before them, the young professional occupants want fun on their doorstep, but they prefer expensively low-lit nightspots. And let's not discount the chaotic appeal of an area with a sleazy reputation.

It's considerably quieter during the day, of course, when myriad small cafes ply their wares. Some of Sydney's first espresso machines were installed here in the 1950s, and the place still runs on macchiato. Then the sun falls, the big Coke sign starts to glow and the city's coolest playground comes to life.

The Victoria Room

Expressing a longing for the good old days of the British Empire is unlikely to win you many friends in Australia. But that hasn't stopped The Victoria Room, decorated in the lavish style of the British Raj, becoming one of Sydney's favourite hangouts. High tea is available on weekends for those who want to pretend they're in Darjeeling instead of Darlinghurst. "It's still cool," says a friend of mine. "Very Melbourne," says another, offering the ultimate accolade for a Sydney bar.

Piano Room

Silverchair's Daniel Johns is a regular when he's in town and Stevie Wonder played the baby grand into the wee hours on a recent visit. Tucked away under the Coca Cola sign, The Piano Room is the new kid on the Kings Cross block. Rub shoulders with a pretty crowd as they sip Moscow Mules in this hybrid cocktail lounge and cabaret room.

Petrol

There are plenty of good cafes in the Cross, and Petrol is one of the newest. The small space on the street level of a grand terrace is dominated by the busy open kitchen. The orange and pistachio biscotti and bread and butter pudding are both excellent, and the outdoor terrace is a great place to watch ashen-faced clubbers doing the walk of shame.

• 9 Springfield Avenue (+410 68 10 18).

The Storrier

You probably can't afford artist Tim Storrier's work - some hangs in the Met in New York - but a night in the hotel that bears his name (and his creations) is more affordable. The first in a chain - sorry, series - of art-themed hotels was converted from a derelict art deco building. Rooms are tiny, but it's staggering distance from the action and there are views of the city skyline from the roof terrace.

Libertine

There's always something happening in Kellett Street, a small thoroughfare off Bayswater Road. The Piccolo Bar, Sydney's oldest cafe, is here, but I prefer another local institution, Dean's Cafe, with its bit-of-this, bit-of-that decor. For something stronger, head to Libertine, a cocktail bar and restaurant. The decor comes courtesy of Paris, the food from Hanoi. No visit is complete without trying a Libertini, a blend of lychee, gin and grapefruit juice.

James Dorahy Project Space

Opened in July 2006, this is the best little gallery in The Cross. It is housed on the first floor of a classic art deco building called Minerva. When a new show opens, people gather on the stairs and outside on the street. The gallery's main space is a sunlit room with an elegantly curved wall. The work is by some of Australia's best emerging artists.

Gazebo Wine Garden

The Gazebo is a cylindrical concrete tower that used to be referred to as a "landmark" hotel. Now it's a "landmark" apartment block with an eccentric wine garden at its base. Don't be alarmed by the small fleet of police cars outside - it's not a raid, just a convenient parking spot for officers from the nearby Kings Cross police station. And yes, that is some form of vegetation growing out of the wall behind the bar. The wine list is one of the city's best - 50 wines available by the glass, hundreds by the bottle.

Becker Minty

At first glance, the rococo interior of Becker Minty looks like a rock star's living room circa 1967. But everything - from the antique diamond rings to the scented candles - is for sale. Each item has been handpicked by the store's globetrotting owners, Christopher Becker and Jason Minty, a charming duo who will happily explain why no one should live without one of their South American T-shirts.